Is Brazil's economy as strong as its soccer team?

Why Brazil’s sovereign debt is rated 1 notch above junk

By Surbhi Jain
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Jun 20, 2014 9:00 am EST

The S&P downgrade

On Monday, March 24, Standard & Poor’s downgraded Brazil’s long-term sovereign debt rating by a full notch, to BBB-—its lowest investment-grade rating—from BBB. The credit rating agency criticized the country’s sluggish economy, climbing debt levels, and Brazilian President Dilma Rousseff’s unconventional accounting methods. At the same time, it didn’t push Brazilian debt to the junk level, which would have likely triggered a massive sell-off of Brazilian assets in the global markets. In fact, S&P actually upgraded the outlook on Brazilian debt to stable from negative.

Exports are declining

Brazilian exports face a threat too. The B in “BRIC nations” (Brazil, Russia, India, and China) began to suffer a slowdown when the export markets of North America, Europe, and Asia that the export-driven Brazil relies on each succumbed to the Great Recession. State-owned oil producer Petrobras (PBR) is the country’s largest commodity exporter. The Brazilian Petrobras is a massive multinational energy corporation in Latin America, headquartered in Rio de Janeiro, Brazil. Petrobras controls significant oil and energy assets in 18 countries in Africa, North America, South America, Europe, and Asia.

China, which happens to be a big importer of Brazilian raw materials, is also facing a slowdown in its growth rate. China’s GDP growth rate has dropped by almost half since its double-digit growth figures recorded in early 2010. Slowing growth indicates a slowdown in business and industrial activity, which in turn means fewer raw materials required. China consumes 60% of the world’s iron ore, but its slowing economies is believed to have led to this year’s collapse in iron ore prices. Chinese spot prices for iron ore have dropped nearly a third since June, which has affected the business of miners like Brazil’s Vale S.A. (VALE), which is the world’s largest producer of iron ore.

To grow faster, Brazil needs to open up its policies towards multinationals operating in the country. High tariffs and laws that require them to use local components and partners often deter foreign investment in the country, which could have been instrumental in promoting economic competition.

A Brazilian pays 144% more than an American pays for a Toyota (TM) Corolla—even one built in Brazil. This difference is in part driven by higher taxes. Brazil’s middle class sure needs stronger purchasing power.

A direct free kick to Brazil by way of the World Cup

At a time when the world markets began to shun Brazilian exports, the FIFA World Cup 2014 spending comes as a direct free kick while also keeping the jobless rates from skyrocketing. The slowdown in the climbing inflation rate has also ensured that the inflation-stricken Brazil doesn’t enter a phase of hyperinflation.

To understand how the FIFA World Cup 2014 is affecting Brazil’s economy, read on to the next part of this series.